To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Guilin Layn Natural Ingredients (SZSE:002166) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Guilin Layn Natural Ingredients is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0096 = CN¥32m ÷ (CN¥4.5b - CN¥1.1b) (Based on the trailing twelve months to September 2023).

Thus, Guilin Layn Natural Ingredients has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.5%.

Check out our latest analysis for Guilin Layn Natural Ingredients

In the above chart we have measured Guilin Layn Natural Ingredients' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Guilin Layn Natural Ingredients.

What Does the ROCE Trend For Guilin Layn Natural Ingredients Tell Us?

In terms of Guilin Layn Natural Ingredients' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 15%, but since then they've fallen to 1.0%. However it looks like Guilin Layn Natural Ingredients might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Guilin Layn Natural Ingredients has decreased its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Guilin Layn Natural Ingredients' ROCE

In summary, Guilin Layn Natural Ingredients is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 24% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Guilin Layn Natural Ingredients does have some risks, we noticed 3 warning signs (and 2 which are a bit concerning) we think you should know about.

While Guilin Layn Natural Ingredients isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.